Question

You are a Financial Investment Counselor, and you have several clients who are working for a very successful technology company. Combined they have millions of dollars invested stock options, which are substantially in the money. You have warned them to some extent about the dangers of keeping all their assets in a single stock, and their reprise is that what other stock or portfolio could possibly give them the 40% annual return they have been receiving on their company's stock in the last two years. How would you reply, remember these are vested options but not yet exercised.

Answer 1

40% annual rate of return is just not sustainable and besides, there are so many risks that can lead a company to lose wealth really fast. Diversification helps manage company specific risks and makes sure that even if one or two companies lose value, the investor, as a whole, is still protected. Imagine having all your wealth in one stock and that company going under. All that wealth is just going to evaporate. So, it is always wiser to not put all eggs in one basket and to diversify.

The investors, in this case, should definitely exercise a portion of their options and invest those proceeds into different opportunities.